The Breakdown - How Much of the Market Meltdown Is Macro vs. Crypto Specific?

Starting point is 00:00:00 The takeaway from all of this is quite clearly a lot of what's happening in the crypto markets right now is the specific byproduct of things that happened in crypto during the bull market. Excess leverage, poor due diligence, institutional opacity. But even acknowledging that and acknowledging that we're likely not through it yet, I still believe that we have to put this in the larger macro context. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, near an FTX, and produced and distributed by CoinDesk.

Starting point is 00:00:44 What's going on, guys? It is Monday, June 20th. And today, we are asking the question about how much this brutal market meltdown is about the larger macro environment versus something specific to the crypto industry. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to join the conversation, come check out the breakers discord. You can find a link in the show notes or go to bit that l.Y slash breakdown pod. Also, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. So, this weekend, a massive, massive psychological line was breached. Bitcoin fell under 20K and Eath fell under $1,000. And by the way, Bitcoin didn't just fall to under 20K.

Starting point is 00:01:33 It went way under, going as low as 17,600. What results, I think, is an inflection point in our discussion of market cycle. And certainly it has for the first time in the last few months brought out a round of the This is doomed entirely style critics. Today we're going to discuss what feels to me like a supremely important question, How much of this is crypto-specific versus wider macro issues. But let's start by discussing the actual move down over the weekend. Bitcoin dropped about 20% between Friday and Saturday and 15% on Saturday alone.

Starting point is 00:02:08 Former BitMex CEO Arthur Hayes said, Over the weekend, while the Fiat rails are closed, Bitcoin dropped to a low of 17,600, down almost 20% from Friday on good volume. It smells like a four-seller triggering a run on stops. Now, whatever the market structure dimension of the actual selling, this price move brought pain both real and psychological. On Sunday morning, Glassnode tweeted the last three consecutive days have been the largest USD-denominated realized loss in Bitcoin history. Over 7.325 billion in Bitcoin losses have been locked in by investors, spending coins that were accumulated at higher prices.

Starting point is 00:02:47 Over the course of the last three days, approximately 555,000 Bitcoin have changed hands between prices of 18 and 23K. Bitcoin long-term holders contributed to the sell side, liquidating around 178,000 Bitcoin at prices below 23K. Investigating the profit and loss by long-term holders sending coins to exchanges, we can see a deep capitulation took place. A few Bitcoin long-term holders even bought the 69K top and sold the 18K bottom, locking in 75% losses. Bitcoin miners are also under stress with their balances stagnating, from the 2019-21 accumulation uptrend and reversing into decline. Miners have spent around 9,000 BTC from their treasuries this week and still hold around 50,000 Bitcoin. Hash rate has also

Starting point is 00:03:34 fallen 10% off all-time highs. If we assess the damage, we can see that almost all wallet cohorts from shrimps to whales now hold massive unrealized losses worse than March 2020. Finally, we can see that as prices hit the 17.7K lows yesterday, just 49% of the Bitcoin supply was in profit. Historically, bare markets have bottomed and consolidated with between 40% and 50% of supply in profit. Bitcoin investor conviction is seriously being put to the test. Now, one important note from a technical perspective is that Glassnote defines long-term holder at 155 days. Obviously, this is not the way the average Bitcoiner would define things. Glassnote does this because they find that's the point of statistically significant difference

Starting point is 00:04:21 in the likelihood that a coin will be spent. In other words, when a coin is in the wallet for more than 155 days, it's much less likely to be spent than ones who haven't been held that long. The point here is that Glassnote is not talking about people who have been in this space for five plus years just up and deciding to throw in the towel, but it's still not a great picture. Noel Atchison, the head of market insights at Genesis Global Trading, said the thought was not to worry.

Starting point is 00:04:45 the long-term investors are holding strong. Well, we've started to see the long-term holder sell as well. According to on-chain data, some of them seem to be panic selling exiting at below cost. Brent Donnelly, the president of Spectrum Market, said the most stunning feature of this bare market in crypto is its monotonic relentlessness. There's no sneaky underlying bull narrative to catch the market short. What was once a massive flood of FOMO money trying to get in is now an equally raging torrent the other way. Will Clemente points out that, quote, Bitcoin sits below its four-year trend for just the third time ever, previous two occurrences, bottom of the 2015 bear market, and March 2020 COVID crash. He goes on to speculate about the implications, saying, I do worry that retail will get shaken out of their BTC positions from increasing volatility, and will see a gentrification of supply

Starting point is 00:05:36 to high net worths and institutions before Bitcoin's hypermonetization takes place. Not that this changes the trajectory of where Bitcoin will go, though. Jim Talbot says it's exactly the opposite that's happening, though. Retail are already rinsed and now high net worths are the people puking because they aren't sufficiently hedged due to blind ignorance and arrogance of how easy it's been in recent times. I think you get from all of this a pretty good picture of where sentiment is. NXO lets you easily buy crypto with your bank card and earn industry-leading interest rates. Earn up to 16% on crypto and up to 12% on stable coins.

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Starting point is 00:07:34 When you trade NFTs on FTCX, you pay no gas fees. Download the FTX app today and use referral code Breakdown to support the show. Now let's discuss interpretations of how much this is specific to crypto versus part of the larger macro. Pro-cycle. On the crypto side, there is no doubt that there has been a string of catastrophic failures. I half-jokingly called Celsius the second horseman of the crypto-pocalypse, and in that construction, of course, the implosion of the Terra ecosystem was the first. Funny enough, though the Three Arrow's Capital News wasn't really out yet when I put out that show, it seems like 3A.C may come to be understood as the third horseman. And as should be clear by now, these phenomenon aren't

Starting point is 00:08:17 totally independent. The implosion of the Terra ecosystem created significant financial stress for companies and funds with exposure to it, either directly through holding tokens or through something like the Anchor Protocol or both. How bad those implications are has been largely shielded from view by the inherent opacity of private fund holdings. And what's more, it may take some time to work its way through an ecosystem to really see how problematic those losses are. Last week, Pantoshi wrote, outside of the Fed, one of the reasons you can't call a macro bottom here, is because the effects of Doquan led to Celsius, which leads to 3AC, which leads to countless others, especially retail. It takes time to play out. How much is left is unknown. Well, a few weeks later,

Starting point is 00:09:00 some of the problems that started with Terra are starting to rise to the surface. And what's more, in the cases that they're not, institutions are racing to argue that they're fine. Michael Morrow of Genesis Trading writes, while our policy is to never address specific client activity, we think it's prudent to provide clarity and transparency to the market in times of great volatility and speculation. Genesis can confirm that we carefully and thoughtfully mitigated our losses with a large counterparty who failed to meet a margin call to us earlier this week. No client funds are impacted. We sold and or hedged all of the liquid collateral on hand to minimize any downside. We will actively pursue recovery on any potential residual losses through all means available.

Starting point is 00:09:40 However, our potential loss is finite and can be netted against our own balance sheet as an organization. We have shed the risk and moved on. Clearly, Morrow is talking about the potential contagion risk from 3AC. It's important to note here, though, that even funds that aren't facing insolvency issues from their tie-ups with some of these things that have gone all the way busts have still suffered major losses. Larry Sermak, who's the head of research at the Block, tweeted this weekend, I track 100-plus ETH wallets belonging to crypto funds to see how and what they are doing.

Starting point is 00:10:12 total holdings in March, 14.8 billion. Total holdings now, 2.2 billion. So funds are down roughly 85% on chain. It's by no means fully comprehensive, but a good enough sample to show some trends. Also, one thing to keep in mind is that they could be dumping on exchanges and the difference would not be counted in this sample, but a relevant data set anyways. Also, needless to say, the total balance in March was a lot of paper wealth. A bunch of vested tokens that went down 90% since. This last point is, I believe, super relevant that a lot of the peak was basically air until it wasn't. To the extent that air was being used as collateral, of course, it could have contributed to the problem. So perhaps it is not surprising that there is definitely a push for more transparency on that front. Frank Chaparro, an editor at the block, says,

Starting point is 00:11:00 question to retail crypto lending firms. How much of your client's assets were exposed to three arrows, and why wasn't that risk properly disclosed or managed? And why should we ever trust you again? It's time for lenders to stop saying they've, quote, managed through this period and straight up say how clients won't be exposed to future meltdowns. Enough of the pussyfooting language. It's time for this industry to hold these gatekeepers accountable. Larry Sermak again responded, noting the messiness of this moment. Quote, my guess is almost nothing in the grand scheme of things. The problem now is that everyone in their mom is spreading rumors about every single lending and yield platform and therefore it's a losing game to leave money there, in my opinion.

Starting point is 00:11:37 They'll run out of liquid cash to service withdrawals. D-Gen Spartan summed it up this way. The game that everyone is playing is just to project a strong front publicly and pray that people don't withdraw funds which would nuke their liquidity and force them to show their hand. Now, obviously the focus here is on the lenders that might have had exposure to some of these funds and riskier protocols, but Ryan Selkis from Masari defines the transparency problem even more widely. Over the weekend, he wrote, going to rage write a post on investor-insider disclosures this weekend. This is getting solved this year and it will be a public data set. He then tweeted a poll, if you own 1% of a token supply as a U.S. fund that raised money from investors of every kind,

Starting point is 00:12:17 you should report every single one of those token and net supply positions along with unlocked schedules. 69% of the 1400 respondents agreed with Ryan. So the takeaway from all of this is quite clearly a lot of what's happening in the crypto markets right now is the specific byproduct of things that happened in crypto during the bull market. excess leverage, poor due diligence, institutional opacity. But even acknowledging that and acknowledging that we're likely not through it yet, I still believe that we have to put this in the larger macro context. Nick Carter sums it up. Crypto-hater's absolutely euphoric right now, dunking, yet economy is headed for recession slash depression. Mortgages are unserviceable. Global energy

Starting point is 00:13:04 and food crisis. 60-40 portfolio ruined. Sovereign debt crisis. inflation rampant. Consumer confidence all-time low. And they're celebrating. It's not like whatever financial asset they own has done well. No asset class has done well. So they're just celebrating misery. To put some numbers around Nick's point, a Bloomberg piece from this weekend was titled America's top 1% lose $1.5 trillion on stocks before the bear market. Quote, even before U.S. stocks tumbled into a full-blown bare market this week, the country's richest 1% were staring down huge losses. The group's overall wealth plunged by $701 billion last quarter the first decline since early 2020, driven by $1.5 trillion in stock losses that were offset by gains

Starting point is 00:13:47 in real estate and other assets, according to new estimates from the Federal Reserve. It's an abrupt end to the extraordinary two-year run that added more than $11 trillion to their collective net worth. Now keep in mind that since the time these numbers were referring to in Q1, the S&P 500 is down another 19% since March 31st, and NASDAQ was down an additional 24% in that same period. Those two indexes were down only 5% and 9% in the first quarter, so the carnage has done nothing but increase. And this is one of the most jarring things about all these crypto dunks. It's like they don't understand that this is a much wider phenomenon. We are in the midst of record wealth destruction in stocks and bonds. The drawdown from the previous

Starting point is 00:14:31 peak in total value of U.S. equities and bond markets is 15.5 trillion, more than 60% of GDP. For contrast, the drawdown in the COVID crash was around 13 trillion and just under 60% of GDP. During the global financial crisis, it was around 7.5 trillion and a little under 50% of GDP. And during the dot-com crash in ensuing recession, a little under 6 trillion and 47% of GDP. So we are in overall record destructive territory. In no universe is this just crypto-specific. In an interview with Bloomberg TV, Michael Novagrats really brought it all together. He said, you have to hold crypto in context of what's gone on in macro.

Starting point is 00:15:12 There were going to be headwinds this year because the Fed was going to have to withdraw liquidity. And so assets that went up based on cheap money forever, if their growth stocks or expensive watches or crypto, were certainly under pressure all year long. What's exacerbated this move in crypto is a bunch of leverage players that had far more leverage than I think people thought. And so you talk about Celsius or three arrows capital that's caused almost something similar to what happened in 1998 with long-term capital management, alleged market-neutral players with monster leverage that's being unwound and creating a ton of fear in the space. And so you see lots of credit being withdrawn from the space, and when credit is withdrawn,

Starting point is 00:15:45 you've seen prices collapse. I look at the U.S. stock market. It looks like it's probably got 4% more to go to 3,500, which is where the 200-week moving average is, where support comes in, and I think you're seeing this liquidation of risk and cryptos get caught up with it. My guess, his leverage has been knocked out of the system, but Humpty Dumpty doesn't get put back together right away. It takes a while to kind of sort through. There'll be bankruptcy proceedings in many companies, and so I think while we should bounce off 20,000 for Bitcoin and bounce off of 1,000 for Eth, it's going to take a little while for

Starting point is 00:16:15 crypto to regain narrative and regain confidence. I 100% think there are people on the sidelines waiting to build, but I think the first buyers from the traditional sense are going to be global macro hedge funds. The moment the Fed flinches and says we've raised enough, we can't do it anymore, I think you'll see lots of traditional macro funds who have had a great year by Bitcoin. We'll add to our position at that point as well. Guys who have done this for a long time realize that soft landing is impossible. And so the economy is going to go into a recession fast. You're going to see the economy just screech to a halt. That's what the Fed needs to do to get inflation down. And so we're going to go through this awkward period where growth is going to be rolling over and inflation is still going

Starting point is 00:16:55 to stay stubborn before it rolls. When the Fed sees it rolling and they signal the pause, then you'll see crypto take off. You'll see other assets follow. To wrap up, what's the point of all of this? Well, one, we need to recognize that this is both a crypto and a macro issue. Because of that, two, I believe that there will not be a crypto recovery until there is a macro turn as well. But three, I believe that as part of the recovery, there will have to be some new approaches that address these specific questions of leverage unwind and opaque environments that we're dealing with now. So I guess the question is, will the next generation of institutional crypto bring a more traditional sense of risk management with it? Only time will tell. But at this moment, I hope that

Starting point is 00:17:38 you were still able to have a nice weekend amidst all the carnage. Happy late Father's Day to all the fathers out there and happy Juneteenth to everyone. One more big thanks to my sponsors. Next dotio, near an FtX. And thanks to you guys, of course, for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - How Much of the Market Meltdown Is Macro vs. Crypto Specific?

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